How do you see the market configuration?
Markets have done reasonably well over the past few days and clearly after the last interest rate hike we saw, the fear seems to have subsided somewhat, at least in the US. Traditionally, whenever the US Fed has stopped raising interest rates, markets have tended to rally. At a stage where they are still raising rates, it is not very common to see the market recover.
So at the moment I would still say there is a bit of skepticism about how long the rally will last and we are already reaching the top. As long as it is assumed that inflation will continue to rise and we will see interest rates rise, there is a ceiling we can go to when it comes to valuations.
Coming back to India, the same problem exists here. We saw after this quarter that many companies reported returns above expectations. Overall, the earnings numbers for the index have been revised lower and as a result we are again touching the upper end of our valuation range with respect to the broader market. Within that, we will always find sectors that are doing well.
Automotive and, more importantly, automotive auxiliaries, public sector banks, etc., should be in an ideal position and continue to grow reasonably well. As long as the right sectors are picked, there may be an opportunity to make money, but overall it will be a much tougher year than people thought and got into.
“ Back to recommendation stories
Is the best behind us? We have seen record profits from oil houses not only in India over the weekend. Also look at what happened with Saudi Aramco. Is the best behind us when we talk about energy stocks?
It’s very hard to tell when it’s behind you, but if you’re just looking at the movement in oil prices, I don’t think we’re done. We will probably see another rise in the price of oil because you cannot have a situation where there is no demand destruction and yet the price of oil continues to fall. On the other hand, if you really assume that oil prices will continue to fall and stay low, then you have to assume that the economy will collapse as a result and we are then looking at a recession at least in developed markets. . So we’re in a weird conundrum where either way it’s not good news, especially from a stock market perspective. We will continue to see a shortage and therefore continue to see prices post another spike in strength.
If you look at energy as a whole, it’s not just oil and I think in India in particular the power sector seems to be pretty balanced and even though we’ve had some strong stock market performance from any power utility including NTPC or NHPC we are in a phase where there is some sort of power shortage and it will continue to add up if attempts government to improve sustainability become even better. More of that space will arrive, but as of today, Power Grid and NTPC, NHPC look reasonably attractively priced even after ramping up.
What is your opinion on insurance names?
I have always maintained that they should be part of your core portfolio.
are doing extremely well with the type of distribution and benefits they have that will continue to serve them well in terms of growth.
These growth numbers are coming to fruition. Some of the others are a bit more expensive, but I think that space is still big enough for a lot of players to grow quite significantly, except maybe the biggest one where you’ll only be able to benefit from the growth of the market and not so much market share gains.
Consideration should be given to building a small portfolio of insurance companies with companies like
and as the two main holdings.
What about some of these big metal names, cement names? Some of them have gotten out of debt and the balance sheets are much stronger?
Well, balance sheets are stronger, but steel companies will be careful not to stay strong for very long. They will grow at the top of the cycle as they always do and they will make sure to get into debt, which will then prepare them for the next down cycle.
When looking at commodities, I would prefer to look at domestic products. We also see the same problem in cement plants, despite the fact that we don’t have an adequate amount of capital utilization in terms of capacity and at 65% or less capacity utilization you barely meet the threshold profitability. Despite this, every cement company continues to grow, but with the choice between cement and metals, I think cement looks like a slightly better long-term game, as larger companies can be bought at lower prices when of a bad day.